Release: Fitch Assigns 'BB-' rating to PGN
Tuesday, June 27 2006 - 06:21 AM WIB
-- Long-term foreign currency Issuer Default Rating ("IDR") 'BB-' (BB minus)
-- Long-term local currency IDR 'BB-' (BB minus)
-- PGN Euro Finance 2003 Limited's USD125 million notes due 2014 and USD150 million notes due 2013 guaranteed by PGN and its subsidiaries 'BB-' (BB minus)
-- National Long-term rating 'AA(idn)'
As the Indonesian government is the majority shareholder and has demonstrated ongoing support to PGN, Fitch believes that PGN's ratings are inherently linked to that of the Republic of Indonesia (rated 'BB-' (BB minus)/Stable). PGN's ratings benefit from the dominant position the company enjoys in gas distribution and transmission within Indonesia. In its gas distribution business, PGN buys gas on long-term contracts at a fixed dollar-denominated price and sells it to numerous industrial and commercial consumers, under take-or-pay gas sales agreements (typically one-to-two year contracts). Fitch believes that gas demand in Indonesia will remain strong, supported by a shift to gas by the user industries due to its price advantage over crude oil. Even after the recent gas price increases, PGN's current gas sales price correlates to a crude oil price of about USD30 per barrel. A progressive reduction in oil subsidies provided by the Indonesian government has eliminated the historical price distortion which led to limited growth in domestic gas consumption in the last five years.
PGN's gas transmission business is managed by its 60%-owned subsidiary Transportasi Gas Indonesia ("TGI") which owns and operates two transmission pipelines. TGI has exceptionally strong counter-parties and it earns a predetermined transmission commission on the gas carried. PGN's ratings are further supported by nearly 80% of its earnings being derived under dollar-denominated contracts, which mitigate the risks of its foreign currency borrowings which are primarily in US dollars. PGN enjoys low-cost borrowings obtained as part of bilateral assistance to Indonesia and from multilateral agencies. PGN's borrowings have a long maturity profile with only about 15% of its debt due for repayment in the next five years.
PGN's ratings are constrained by its ongoing substantially debt-funded expansion plan which involves laying two pipelines connecting South Sumatra to West Java ("SSWJ") at a cost of USD1.1 billion. Project risks are mitigated by PGN securing firm gas supply contracts, the high demand for gas in the West Java region, and funding for the project being almost fully tied-up. The pipelines are likely to result in PGN more than doubling (by 2008) the gas it currently distributes. Fitch also expects PGN to face a high level of competition in constructing new pipelines in the future, reflected in it being outbid in the Gresik-Semarang and the Semarang-Cirebon pipeline projects. However, PGN's current pipeline network is protected as new contracts will be awarded by the new oil and gas downstream regulatory agency, "BPH Migas", only where the existing pipeline network is fully utilised.
The Stable Outlook reflects Fitch's expectation that the demand for gas will remain high and PGN will complete the SSWJ project without significant cost and time overruns. A sustained downward movement of crude prices (to a level near USD30 per barrel) resulting in PGN having to reduce gas prices may trigger a negative rating action. Any negative rating action on the sovereign ratings will also result in a similar change to PGN's ratings. Conversely, a positive rating action on the sovereign and an improvement in PGN's credit metrics after completion of SSWJ, resulting in a sustained net debt/EBITDA ratio of less than 2x may result in a positive rating action.
PGN has historically maintained a conservative financial profile and strong credit metrics, reflected in a net debt/EBITDA of 1.1x in 2005. Fitch expects PGN's credit metrics to deteriorate in the near term as it completes funding for the SSWJ project. However, its increased leverage is likely to be offset by incremental cash flow generation from SSWJ, moderating the gearing levels by 2008. (end of release)